Thanks, Tim. Appreciate the opportunity to have a chat with Farouq Tuweiq from Bel Fuse today. Farouq, I think—thank you for joining. I think we'll get started with a high-level topical question, let you run a little bit, and talk about the Bel story. Kind of, you know, how are you thinking about today, the high-level journey for the company since you joined, key adaptations across areas like product, pricing, and contracting, operations, and commercial efforts? I think the last one is something that is, you know, still in development, a little bit more than the operational side, but I'll let you answer the question.
I appreciate it, Christopher. Again, thanks for hosting us at the conference here. Always enjoy the opportunity to speak to our investors, and thanks to all the participants here today taking some time out of their busy schedules. Christopher, to maybe just answer a question here. I joined roughly four years ago, in February 2021, right? Kind of sort of a little bit in the early days of COVID, still trying to lock down. Here we are four years later. As we look at the journey that we've come from, it's really been one of change and transformation. We are not afraid of taking and have taken big swings. We will do the right thing as we set Bel Fuse on a healthier course for the years to come.
To put this in perspective, when we started the efforts here back in early 2021 , we were roughly, call it four times levered, 5% EBITDA margins, mid-20s gross margins, up and down profitability despite kind of what is happening on the revenue side of things. We realized early on in 2021 to get under the details as to kind of where the issues are. We had a lot of feelings and assumptions and views on where things are. We still needed to, before we could take steps, we really needed to get down to the facts of what is going on and where the issues are. Luckily for me, July, so roughly, call it four-ish months of me joining, the ERP system got complete. I would say the ERP system in July in 2021 was really functional, but not necessarily data analysis-driven.
We spent the next few months really dissecting the data. We had this mantra back in 2021 called measure to manage, right? There's always the assumption companies are in the business of managing, but I think we realized pretty quickly we should just do a lot more measuring. We started looking at SKU profitabilities. We started looking at contributions and profitability where the products are being designed, which are indeed centered globally. We started looking at factory profitabilities. We started looking at various KPIs on the operational side of these factories, employee productivity. As we stitched it all together coming into 2022, we realized that roughly a quarter of our backlog was negative gross margins. This was at a time where backlogs were extremely stretched out.
We kind of really went to work in early 2022 on starting off with pricing, and then it migrated into the operational side of things. We had launched four facility consolidations in 2022. It was at a time that we hired a new head of sales for our European business, and we swapped out roughly the whole team out there as well. 2022 was busy. Heading into 2023, we announced another facility consolidation. We continued to work on the four that we talked about. We continued to push the organization on different areas like sourcing, how do we procure, getting our data continuously cleaned up a little bit as we thought around getting our commission structure in place heading into 2024. 2023 was busy heading into 2024. We saw our sales obviously go down given the over-inventory in the market.
Despite that, we saw our margins continually improve, which was always a question that investors had back in 2021, 2022, is how would your margins hold up in a tough environment? I think we, for what it's worth, came out proving our ability to kind of hang in there. The team has done a great job despite some of the headwind challenges in 2024. We are also in 2024, marked some new addition of teammates. We hired our first global procurement individual, along with our first-ever Head of Global Sales, as we think about professionalizing and normalizing all aspects. Uma joined us in October, and he's been kind of heads down analyzing the organization, understanding where the puts and takes are, where there's improvements are going to be and need to be. To me, that's a very exciting part of it.
The market obviously was not going for us in terms of sales. Now, when we talk about sales, I think we do ourselves a little bit of a disservice in the sense that it is not like we have been sitting on our hands. Like I said, we swapped out the whole Europe team in 2022. We have done other things like hiring key folks in certain verticals to focus on it. We have moved some folks around. It is not like something we have been neglecting. I think we are just being more strategic versus holistic. We have seen the evidence of some of those activities in the AI space, some of the things that we have been talking about on our recent phone calls. When we look at it, we have come a long way.
The other concept is, maybe just to take your question a little bit here further out, I tend to think of people, process, performance. On the people side of things, you're always assessing, do we have the right people around the table? Are we missing people around the table? Do we have too many people around the table? Obviously, we'd look at this by function. We've done a fair amount of people side. The executive team, with my assumption of the CEO role here in a few weeks, with the executive team, including CEO, there'd be one person that predated me. Everybody else would have been new, which is a big change for us. When we look at layer two and three, that's where you can start seeing more of this change.
The fuel part of it, and we hired Uma, like I said, in October, head of sales and head of strategic procurement as well and above. We're starting to really kind of poke at the people side of it. On the process side of it, which is what we've been doing the last few years as well, is what systems are you using? What is the process in place to take an order? How do you market? How do you sell? How do you compensate? How do you reward? How do you gather intelligence and data to really drive and motivate and encourage your people to perform to the best of their abilities? If you get the people side of things correct, if you get the process things correct, it should yield performance. You need to define your KPIs. What is it we're shooting for?
What is it we're aiming for? I would say that we have done a fair amount of this work. Specifically to your question on the commercial side, we think there's some things we need to understand in terms of are the people in the right seats? Are we missing some people? Where does that need to be sitting? On the process side of things, we've done a pretty good job of the commission structure, but we need to make sure it's more fine-tuned and motivational for folks. We need to understand what is the best funneling process for our sales team, what is the process of funneling, what does good revenue look like, what does attractive opportunities look like? We need to look at our various tools to ensure we're not leaving margin on the table.
I'd say we've done a pretty good job on the process. There's still work to be done on the process and realignment and reshifting some of the areas that we need to go through. On the KPI side of it, we're starting, like I said, seeing some performance indicators specifically coming out of commercial like AI and space defense, but we need to make sure that it's more broad-based and culturally trenched from a growth mindset. One kind of comment, I'll just kind of—before I pause here, Christopher. A lot of investors ask us the question of, "You guys have been at this for four years. When do you get to the finish line?" The way I tend to think about it is we're really not at the finish line.
We're just getting healthier, leaner, and more serious as we step up to the start line. Once we get everything organized and cleaned up, you really are at the start line. The start line is growth, right? What does the next three to five years look like for us? We are a long-cycle design business. For us, it's really that getting to the start line, healthy operations, faster delivery time for our customers, competitive pricing, whether to make margin or open up new doors, and then ultimately driving for growth, both organically and inorganically. Obviously, we took a shot with Enercon. It was our first big one here in a few years. We think of it, we're just getting ready to get off to the races here. That's what excites us. You're on mute, Christopher.
Thanks. Sorry about that. You talked a little bit earlier in the day about going from the start line, particularly in terms of top-of-the-market type opportunities like defense and medical, and then at the bottom, high-volume stuff, which you've effectively exited where you face off with China competitors, and then managing risk in the middle tier where there can be a lot of that incremental strategic growth. Could you revisit that framework a little bit?
Sure. So really, we think about our business, and I think the pervasive view in our world is we are an in-market-driven business. There are reasons for that. If we think on the high end, as I would classify it, end markets, we would put defense, commercial aerospace, space, rail, markets we participate in, medical. We do a little bit of medical as well. We would like more of it. We do not really do anything semi. We do random things here and there in semi, but not a core market. These higher-end markets tend to be low volume, medium volume, high mix, medium mix type businesses, longer design cycles. Quality and performance over time is key. Brand names like Bel Fuse and the various sub-brand names that we have are critical.
Performance over time that you'll be around to support your customers, whether it be new engineering cycles or if there's anything that kind of goes wrong, that you'll be there, that you'll be a reliable partner. Us being around for 75 years carries a lot of weight to it. These customers really require, and you can win in the trenches with a lot of hand-to-hand holding with the engineering team developing. In some extreme cases in defense, we'll chase something for five years. Ultimately, it may come to fruition or may not come to fruition. Generally, we don't see a lot of Asian competition in these end markets. These end markets, let's call it the high-end end markets, harsh environment, is roughly 50% of our business today.
When we look at the other end of it, extreme, which is the consumer and auto business, that tends to be a big spend, heavy Asia competition, short design cycles, big price down components, generally very high volume, and I would say low mix. Roughly 5% of our business is consumer with a little bit of auto in there, but that's not a core focus of ours. There are some nice spots to be in there, but you just got to be extremely careful where you're playing, who you're competing with, and how you go about your business there. That's roughly 5%. Fifty percent is a harsh environment, 5% consumer. Forty-five percent is the middle, which tends to pull on both ends of those barbells. It can be low volume, but it could be high volume. It could be low mix, could be high mix.
Price matters, but so does quality and reputation over time. In this middle market, you really got to be smart in picking your spots. In this market, it would include things like testing measurement, automation, oil and gas, general industrial, networking, data centers, AI. Generally, we'll see price either hold steady or generally price down concession type of environment. Being operationally sound is extremely critical in this part of the business. One of our famous case studies is we used to have a $25 million book of business with Meta where it was negative gross margins, right? You just really want to be careful where you're at. The nice thing about this middle market or medium quality, let's say, with all of our operational cleanup that we have done, it allows us to be more price competitive.
It allows us to move a little bit quicker and participate in those markets, right? You can't avoid those markets. They are really good markets. We just want to make sure that we're being thoughtful in our approach. That is how we tend to think about the world. With Enercon, obviously, we became more on the harsh environment side of things, which also, as we think about just growth and future opportunities in M&A, I think we want to make sure there's parity and balance within those.
Okay. Great. I did want to get into some of the how you fit. By some measures, you're small. People identify in the sector, Littelfuse, even Amphenol, Intel. The industry is also very fragmented. In some measures, you're big. What do you see as the advantages and maybe disadvantages from that kind of situation where you fit in the scale within the overall industry?
We service, we have three product groups, and we have different products within those product groups. Really, the answer is kind of the great it depends. I think the overarching theme of where we are today, Bel Fuse in the world of components, even if we look across the three segments of the markets that we participate in, there's an extremely large TAM out there. We are, I'd say maybe in some places, we might register on the TAM scale, but largely, we tend to be, we think there's a massive runway out there. Some of the names that you mentioned, Amphenol and TE are great, great companies. When you look at the TAM ownership, it starts to get thinned out pretty quickly once you bypass maybe the top three, four people in our space. Again, I'm not talking about consumer and the auto folks.
You see a very, very fragmented end market. We think that's a good thing because it means there's opportunity for a lot of folks and also represents a lot of M&A opportunity, and we see that. In terms of us competing against some of our bigger competitors, we lose business for them for sure. We also win business for them. The question is, why do we win? One, I'd say factor is the scale side of things. We're big enough to service big customers. The dollar amount where it's really meaningful to us could be different from some of the other competitors. The other thing I would say is we can be as nimble as the smaller guys. We're kind of a tweener, nimble as the smaller folks and as technologically sophisticated and competitive as the large folks.
With the difference of with our sides, we can care about lower dollar amount thresholds, maybe some of the other folks. Ultimately, it's really about brand name and engineering chops. With our brand name being around for 75 years, it's no small feat. We've seen many companies come and go. Companies know we'll be there over time. We've proven this over time. With our brand name and reputation, we have also shown performance over time. Especially for risk-averse customers like in defense, that's a key, key, key element to it. Our people on the engineering side are amazing. Given the long-cycle design business, even when our sales were down in 2024 pretty meaningfully, R&D and engineering is not really something that you want to start focusing at. We've done this throughout time. Even in tougher times, we have always committed to all things engineering.
We'll be smart in our investment profile, right? Where we need to go, we need to double down. We're not shy of doubling down in key areas as it makes sense. We win for multiple reasons, like I said. The other good thing I would point out is with our scale, if we were to win $30 million of new business a year or new customers, I mean, that's healthy for us. Versus maybe other places, $30 million might not be as interesting. I think we have a lower base that we can just go up from. I think we like the trajectory that we're on here.
Yeah. You mentioned the, my words, the amazing transformation operationally past several years brings you to the starting line. You're not starting from a standing start today in terms of the commercial side and all the things you talked about. It is a little early days. I think the next year or maybe year or two be more market-driven given the design and cycles. Given it's not a standing start, how do you see the strategic growth on the organic side cycling into the cycle?
Yeah. We have seen where we have, when we think about sales and go-to-market, there's really kind of the direct key account manager folks where when we dedicate people to really own a specific product or a specific market, we've seen Success Space being an example of that and also a big focus on AI. We saw that in mobility, obviously a little bit tougher times right now in e-mobility. Where we've gone that really kind of deep approach, we've seen the benefits come through. We do have distributions of different kind of go-to-market and how do you handle that channel versus kind of these key accounts. We've seen that also in defense and commercial air. I think we really are kind of focused on, we do a great job on the top of the house accounts, if you will.
We do a great job, probably the best distribution team in the industry, obviously biasedly here. We need to really mine and hunt for those tier twos, the rising stars where we can grow into and grow up into. We have been hunting some of these tier twos that we have seen in the AI side and space side of things. The question is, can we go more broad with it and deeper with it? That is going to be kind of maybe teasing a little bit of our approach here. You are right, we are not standing still. We were, let us call it situational, given too much inventory in the channel that was going on.
As we've seen the world heading into 2025 open up and some of the demand drive becoming more robust, and now with on board, the question is, how do you harness all of that? Ultimately, the question is, what are you trying to stitch here together at the end of the day? That is kind of like our operations, which is able to perform through the cycle, whether it be the ups and downs, right? We want to make sure that we're doing what we're supposed to do when things are not good and also not getting complacent when things are good. On the sales side, we want to make sure that we can have enough diversity of end markets and products that can allow us to be more resilient to the cycle ups and downs, which we know we'll live through as history has shown.
The question becomes is, okay, if we were to kind of close our eyes and look out beyond the next quarter, I think 2025 will be a year where we do some cleaning up on the commercial side. If we kind of look beyond 2025, what is it we're aiming for? We really need to be aiming on a robust growth business organically and inorganically. On the organic side, we talked about it. The question, we'll kind of leave markers out there. Generally, we want to be in some of the better performing parts of our business is kind of the goal. If the industry average is X, we want to be a little bit north of X.
I think the challenging thing for investors to look through is usually when companies, they'll have good times and then kind of they go through a bad time. In the bad time, they say, we want to get back to what we were. While we have a lot of good in our past to point to, we want to make sure we're trying to break away from the past and we're creating a new path forward here, which does create a little bit of uncertainty. We're going through a little bit of a self-discovery of what we want to be. Ultimately, when I took on this job four years ago and the new job coming up here, I'm more convinced of our road ahead today than even I was four years ago, quite frankly.
We're very much excited about that challenge of proving it out to everybody on the phone call here where we can go with this.
Great. Speaking of everyone on the phone line, there is a Q&A portal. Feel free to use that, and I'll be taking a look at that. For wanted to switch over to the inorganic side. You just acquired Enercon. A little more than doubles your aero defense exposure to, I think you said it was 38% of your mix in the first quarter. Pretty amazing. I think you paid 10 times 25 EBITDA with those margins nicely into the low 30s. Just wanted to go over how you landed so favorably and how that should inform us in understanding your capital allocation posture.
I agree. I think Enercon was a great acquisition. To put it in perspective, if you look at the various metrics out there, there were a couple of assets that traded in our industry last year, almost similar size in the EBITDA defense businesses as well, that traded roughly in the 15.5-16 times. We paid roughly 10.5. Let's call it a third of a discount. Part of why we landed so favorably here, there are a few reasons. One is the competitors for assets in the US tend to be a fair amount of private equity. Obviously, private equity at this size tend to be more America-focused type PE shops. Generally, their mandate would not allow them to buy a company HQ'd in a foreign country. That leaves you with the strategics.
We know strategics obviously are around the hoop and people looked at them. There was a lot of interest in them. I think there was some concerns, I should say in general also, Enercon flew a little bit under the radar because I think most American folks looked at it as, oh, it's a company in Israel, right? For those that dug in, the larger American folks kind of come in with this view of, well, we're going to take synergies out and we're going to start pushing and pulling. I think in the concept of we're going to buy 100% of the business from day one, right? Just the philosophical approach is a little bit different. When we look at the owners of Enercon, which is an Israeli-based PE shop, they tend to really focus on who's going to own the asset.
That's an important critical deciding factor. Israel is not a big country. Therefore, if you're the PE shop that sold a company to a foreign American company and everybody got fired, that becomes a very bad look. For us, we didn't have, let's say, we didn't need to underwrite synergies in the deal, the cost side, right? We didn't pay 15 times. We got to synergize it down to 12 or 11 or 10. That was kind of a big risk factor taken off. Two is from our size, having Enercon being a centerpiece where there's opportunities for growth and visibility to the top leadership was an attractive opportunity for the PE ownership. Also, this was a very cherished asset by the PE guys. Having a 20% stake, allowing them to continue the ride once they saw our vision for the business was very enticing.
We were flexible in our deal structure to allow that 20% remaining under them. That is how we kind of came about it. Another thing I should also say, at the board level, there was some really strong connectivity to the PE folks. We also kind of knew them as well. The stars aligned on this one. In terms of Enercon the asset, I tend to look at things both from the math side of things and the story side of things. The math, how much you are paying for it, what is your financial profile, what do the returns look like, what is the accretion, right? The typical mess of how much is going to lever pro forma, how are we going to pay for this asset?
When we look at the math piece of it, it really checked all the boxes. Returns, accretive to all of our financial profile, accretive on day one down kind of on an up gap basis, kind of out of the gate here. We did not stretch ourselves too much on the leverage side. It kind of hit all the math questions. On the story piece of it, you hit it on the head, right? Which is more defense commercial exposure, largely, largely the vast, vast, vast majority of business is sole source. It is an expanding TAM, not a whole lot of competitors out there. They have outperformed the industry eight out of their last 10 years, roughly. From our perspective, it opens up a new market for us in Israel where we can sell connectivity products today. We do not have any presence there.
We do believe one plus one equals two, especially on the revenue side, especially in Europe. There is a lot of demand for their products in Europe. Their challenge was always they had no manufacturing in Europe. In Slovakia, we have a power factory. The question is, can you manufacture some goods there to service the Europeans saying that you do manufacture in Europe? Our connectivity segment, which does sell to the defense folks in Europe, has two facilities in the U.K., and they have access to all the customers. You have customer access. We have the power plant in Slovakia, and then Enercon has the product set and knowledge. If you marry all those three things together, it could become a real powerful play. The U.S. is an obvious kind of thing. We have some relationships stronger than theirs. They have relationships stronger than ours.
We'll cross-pollinate there as well. It kind of hits on a number of the math and story themes here. Maybe going forward, we would do an Enercon deal every day of the week, but that's just not the reality of the world that we live in. I think what investors should take away from that is, one is we are going to do M&A that's different from the past. We want to be in a more defensible moat-driven business and technology. Three, we're going to be prudent. We're not going to be afraid of taking big shots, but we need to make sure that there are multiple ways to make it work, right? We can't buy what I'd say one trick ponies where if you do this, then the deal works, and then that's a very risky proposition.
We want to make sure there's a few different ways we can get to that. Enercon being an example, we don't really need any synergies to make the deal work, but we know there's revenue synergies and we know there's cost synergies. All that would be gravy. If you zoom forward one year, Chris, right? If we look at 2025 EBITDA for this business, you're buying a business in the singles in terms of multiple. That is kind of how we think about it. Good end markets, defensible businesses, good profiles, margins. If not out of the gate, we can get there. Investors will ask, would you do a turnaround? I'd say, it depends, right? On size, how sure we can get it to go. We've worked really hard to get to where we are at today.
If we're going to take a little bit of a step backwards, there has to be a hell of a reason as to why and we can for sure get there. That's kind of the way we think about it.
A couple of things out in the defense market, wanted to hit on real quick, and then we'll have some closing questions. Enercon exposure, the intensity of Israel's defense needs right now kind of slows down from a geopolitical perspective and any exposure to guided weapons JDAM, which is ramping up domestically and our defense qualified trading partners.
Yeah. I would say we asked ourselves this question. Remember when we started doing diligence here, it was roughly, I think it was April or May last year. You were very much in the thick of all things war. As we went through diligence and we announced the deal in September, things started to calm down a little bit. I think the ceasefire happened between sign and close in November or shortly thereafter. I can't remember exactly. One of our big themes was, what if this all stops? Where we've settled on, and they've proven this out in their history, is coming out of the war really started with Ukraine and then obviously with the war there in Israel. I think the global posture has changed, including we're seeing India, Pakistan right now, and Taiwan and China, right?
I think there's just a big change in global perspectives on defense spending. We're seeing that obviously in Europe and the U.S. as well. Even while DoD is taking action, we still think there's going to be spending in the hard weaponry. In Israel specifically, the conclusion there was, even if the war stopped when we're going through diligence, this is a multi-year replenishment cycle given how much drawdown there was with the munitions and artillery there. More interesting than that is we have seen battle-proven technology succeed. Israel has always been one of the top 15 exporters of defense technology globally. We think that's going to actually increase.
We're seeing, I think there was an article beginning of February in the Wall Street Journal saying about how the Israeli technology proving out and the advancements is really allowing it to become an exporter and bigger exporter into defense tech. What's interesting now is we look, for example, Slovakia is going to put, I think, a $500 million Iron Dome thing there. There's one country in the world that knows how to do that. I think Denmark was potentially talking about that. What's interesting here is we look at the Europeans, I would say there's questions around their desire to procure American-made weaponry. They'll still buy a lot of American weaponry. I would say they are open for a level for a business. I think the Israelis would be primed to maybe capture some of the market share.
All of that, I think, would be additive for us. Whether the Europeans buying from the Israelis or from the Americans, I think it's all additive. The way we slice and dice it, we thought this would be a multi-year kind of ramp up on the spend side of things.
Great. You put, I think, $8 million-$10 million of exposure to demand fluctuations around tariff, trade, strife in the guidance. Was that speculative or related to something specific? Because we've generally seen companies not talk about demand disruption yet, though a few, including some very high-quality companies, have a slice where it's like, okay, on hold, we'll get the supply chain rejiggered, boom, game back on. Just curious the context of that 8 -10 .
Yeah. The 8-10, we started seeing as kind of April went on a little bit here, I'd say we saw a little bit of hesitancy specifically on the distribution side of the business. If we think about this for a second, right? If you're going to buy something from China for $10 and pay 150% tariff, just to use some round numbers here, your cost of goods is $25. If the next day the tariff drops to 50%, your cost of goods is $15. In a razor-thin business, you don't want to have a cost of goods at $25 and the next day it goes down to $15 because you're not going to be able to sell the $25 and take some big write-downs on that.
As a result of that, we tend to see distribution, especially when there is no customer identified, so to speak, they tend to copy each other. If somebody goes on pause, then a lot of people will go on pause. We kind of started seeing the snowball effect. Let's just take a pause here for a second. The way we read that situation is there's inventory on the shelves and now they're going to over-deplete the inventory, right? Because there's still demand. We're seeing a depletion at the shelf, if you will. The question is, when do you resume ordering? When the shelf is empty? When it gets a lot more lower? At some point, businesses will want to generate revenue and we'll turn on the distribution folks and we'll turn on the spigot. The question is, when? And how much?
What we think is interesting here, there could, it's not unforeseeable to potentially cause the opposite problem of over-inventory, right? Which is your under-inventory, kind of like the COVID days, where people keep holding back on fulfilling their demand and ordering. One day, if we get clarity on China, everybody turns it on very aggressively. All of a sudden, now your lead times get extended. There is some chatter around potentially you're heading back into shortage time, which ultimately would be a good thing. The other thing I would say is on the $10 million, we do have, we're working with our customers, right? We want to make sure these are the times where you build good bridges with your customers. Of that $10 million, we have some stuff that's finished goods. Now we're just holding onto it.
In theory, right, if the floodgates open up on, let's say, June 15 as a random date, we could ship a fair amount of it out. If it opens the last day in June, I give you a different answer. We said, listen, this $10 million roughly, there's some question marks around it. I think people need to, you know, are trying to understand the market. The unfortunate part of that discussion is when we came out with it end of April on our earnings call and we look everywhere else in the business, even quite frankly through April, right? When we look at the bookings month over month over month, we're seeing strength over strength over strength from January to February, February to March, March to April.
We are seeing that uptick in kind of the demand, which is back to what the call we set in February where we expect growth for the year. This $10 million, you know, I think is a little bit of a pause. Let's wait and see approach. Even when you factor that in there, you know, we definitely are seeing some nice things in the business and uptick in all things bookings.
Appreciate that. We're a few minutes over, so we'll sign off. Great chatting with you. Congrats on everything that's been transpired in the company. We look forward to sticking around and watching you keep it going.
I appreciate it, Christopher. I appreciate everybody's.